College Savings are hard to plan

If DH and I remain employed at our current jobs for the next ~6 years (something that is not incredibly likely given DH’s job situation), then we will not qualify for financial aid at most schools.  (IIRC, we’ll be in the phase-out range for Harvard and Princeton and may be able to move money around to get some aid there.)  If one of us loses a job, then DC1 will qualify for about ~10K/year in aid at many private schools, which isn’t that much given sticker prices (although on just one income, hiding moving money around will have a larger effect).

We currently (barring weird changes in the stock market between the writing of this post and its posting) have around 98K in DC1’s college account.  That’s $500/mo for the last 10 years invested in Vanguard.  That’s enough to go to our local flagship schools for 4-5 years if we stop saving now.

And that really sounds like a lot.  But in the world of private schools it isn’t.

It’s hard to tell what DC1 will want to do in 6-10 years, but current indications are that computer science or some form of electrical engineering will be involved.  Zie might want to go to MIT or Harvey Mudd or Stanford (and zie might get in– it is hard to say).  These schools are not cheap, and at >55K/year in total costs (and rising), there’s not enough in the 529s to pay for even two years of school. We have another $170K in taxable stocks (that’s from the 50K we had in 2005 and the leftover money from leave we just put into the market) that presumably we would use for the remainder.  However, we will be taxed on that remainder, so it might make sense to start saving *more* in the 529 vehicle while we still have six years for earnings to accrue.

Indeed, the simple saving for college calculator suggests that we would need to more than double our monthly contribution for MIT and almost triple it for Harvey Mudd.

If I drop DH’s income, then the college calculator suggests we should start putting away $638/mo, which is still more than the $500 that is currently going towards college.

Both Harvey Mudd and MIT have 5-year BS/MS programs that are a good deal.  DC1 is so young– maybe we should be open to funding some graduate school.   It is also true that we have two children, and by the time DC2 is ready for college, we should know how much DC1’s experience ended up costing, so we’d be able to move some money over.  As of this typing, DC2 has $33K in hir 529 plan.  We’re on an oversaving path for hir for state school (the calculator recommends cutting back to ~300/mo), but would need to put away more for the average private school– for my alma mater, for example, zie would need more than double what we’re putting away (same for engineering schools, though it’s harder to tell if engineering is likely with a preschooler compared to a 6th grader).

Looking over all my old 529 posts, I usually contemplate putting less money into the 529s.  This is the first time I’ve addressed putting more money there.  I’ve been assuming we wouldn’t pay for any graduate school and have been worried about the risk of over-saving.  But with only 6 years left before college, I think it is unlikely I’ll end up moving to work for a university that pays even part of school tuition.  And college costs have been increasing, as has our net worth.  Maybe it makes sense to get more tax advantage, especially given that in 6 years taxes may have to go way up (or inflation may be sky rocketing).  It’s hard to say.  Not to mention that $500/month isn’t worth what it was 10 years ago.

And we’re no longer paying $1200/mo in principal and interest on a mortgage.  If DH doesn’t lose his job, that money has to go somewhere.

Under what circumstances would we regret putting more money in the 529s?  1.  If we move to the bay area for DH’s job and want to buy a house.  That scenario suggests needing loans for private school and DC1 being on hir own for graduate school.  2.  If for whatever reason neither DC1 nor DC2 end up using the money (ex. tragedy, one or both of the DCs becoming successful entrepreneurs, both DCs deciding they prefer much cheaper college options).  3.  The world goes to heck and we have to leave the country (in which case money in the 529s will be very low on our list of regrets).

Ugh, I keep going back and forth on this.  I could increase our monthly contribution to be more in line with what the simple calculator thinks we should be contributing, and then we could cut if off if DH loses his job.  We could put in a lump sum (though dollar-cost averaging seems much less risky given the current uncertain political environment).  I could split the difference and put in, say $750/month per child instead of either $500 or $1000 (which is about what we would need if I kept my job and DH stopped bringing money in entirely).  Or we could just keep doing what we’re doing, which is usually the easiest thing to do.

*note for newer readers:  We are already maxing out our easy retirement options (required contribution, one 401K, one 403b, one 457) and will pay off our house very soon.  So don’t worry about our retirement savings or debt loads!

What are you doing in terms of college savings?  How do you decide to change what you’re doing?


46 Responses to “College Savings are hard to plan”

  1. Leah Says:

    We are saving what we can in a 529 (nowhere near you but a decent 2x a month contribution), but we don’t max out retirement other than our Roth IRAs. So I debate if we shouldn’t be saving anything, since it will be held against our kid in calculating financial aid, or if we should do more. We have done a few lump sums when windfalls have come our way.

    My parents paid for my college from cash flow. I’d like to pay for my kids’ college, as that was an awesome gift from my parents. It allowed me to really explore in my 20s and not stress about debt, and it’s allowed me to have a job I enjoy (most weeks) and not worry about the low earnings.

    I wonder when the college bubble will burst. At some point, the increase is going to be unsustainable.

    • nicoleandmaggie Says:

      You should probably save for retirement instead of a 529 unless you are set against getting loans and paying them off yourself, precisely because retirement accounts are usually not included in financial aid calculations. You can always save less in retirement later.

      • Leah Says:

        We are saving significantly more in retirement than the 529 plan. Just not maxing out our 403(b)s. I do max out our HSA and Roth IRA.

      • nicoleandmaggie Says:

        Depending on what you put in the HSA, I would actually recommend (realizing I am not a professional and YMMV) putting more into the 403b before putting any in the 529 (not counting gifts to the kids of course). First, at retirement your housing will no longer be paid for you meaning you need to put a larger % of your income than standard heuristics. Second, given your low incomes, if the D.C.’s are smart, which they likely will be, they stand to gain lots of financial aid, but every dollar you have that isn’t hidden may count towards tuition. Instead, I would put as much as possible towards retirement and then stop contributing anything other than the match when the D.C.’s go to college if necessary (or better: stop contributing and put that money towards their subsidized loans after), though the loan situation will depend on politics in 16 years give or take.

      • Leah Says:

        oh, lots to think about! Thank you. I think we should meet with a financial planner. Our stumbling block is not knowing who. How does one find a fee-based financial planner? I don’t think we need active portfolio management; I just want to talk with someone who knows more than me and can help me chart a plan. And what do people pay for this sort of thing?

      • nicoleandmaggie Says:

        Walter Updegrave used to have a really good how-to find a fee-only financial planner post on his money page. I would check his blog to see if he’s got something updated and similar now.

        Maybe this?

  2. College Town Says:

    We are in the same situation in terms of what is saved already and not knowing how aggressively to pursue private school savings. Between the two of us we have undergrads from top 10 SLACs and graduate degrees from top privates in our respective fields. Loans were taken for one of the graduate degrees, which were paid off within ten years. With retirement savings on track, it becomes a question of “does this money go to our children’s education or to make our lives more secure?” I am very conflicted about not helping my children in the way I was helped versus taking a step back and questioning the price of private education and the trade offs inherent in making that decision. After working at two top privates and now a non-flag ship public, I’m almost too close to the issues. These institutions are very different. I’m interested in your perspective having attended private undergrad then landing at public as a professor.

    • nicoleandmaggie Says:

      Well… there are big differences among publics as well. The kids we get in our grad program from regional midwestern uni have a much better understanding of ambiguity than the kids from schools in the south, even flagships. It really depends on the individual school. But for us, Berkeley or Michigan out of state would cost about the same as many private schools, so we’re treating them as such.

  3. A Says:

    You could also consider European universities. It depends on the exchange rate and the amount of aid you’d get, but Cambridge should still be cheaper than Harvard; and while say France or Germany might having nothing in that league, they have plenty of universities that can compete with the state flagship universities in the states — and they are (essentially) free. One probably should learn German or French before going there, though.

  4. Shannon Says:

    We’re in the same boat as you – what we have would basically pay for flagship in-state for 4 years, but only about 2 years at a private. My husband and I both have PhDs, but we paid for graduate school on our own (mostly fellowships with a small amount of loans), and I am pretty inclined to do the same for our kids. Given that, I’ve been drawn to the advice that you should pay 2 years out of savings, 1 year out of cash flow, and the last year out of loans which you pay down quickly afterwards. That would be our scenario for a private, so I think that’s what we’ll shoot for. I guess like you, I am somewhat concerned about over-saving, but I suppose that’s a good position to be in.

    • nicoleandmaggie Says:

      It makes so much sense laid out like that. But still, there’s the complication of us having two children some years apart and being able to move unused $ to the second child. And maybe we’d be ok paying for some grad school…

      We could actually cashflow our kids’ college if they went to school here and lived at home– it’s about equivalent to the cost of daycare…

  5. SP Says:

    This post makes me terrified to have kids!

    I mean, I know it is something that you can make work in a lot of different ways – but the numbers are just terrifying. And while you don’t have to pay for college (and indeed, my parents did not), I think we’ll have the means and desire to contribute. If I had a college age student today, I would offer in state tuition at the UC system, since they have some top notch programs it would be hard to justify otherwise. But who knows what the case will be in 20 years.

    Anyway, I have no useful comments, just my panic at reading this!

  6. bogart Says:

    We have just the 1 kid and my current employer offers a pretty good tuition benefit — I have a colleague who’s kid is currently … where? Cornell? Something like that. And with no (other) aid it is running him $30K/year. Which, obviously, is not small potatoes, but is still a significant subsidy.

    We have had a good, affordable state system, but our state legislature is working (hard!) to eliminate that.

    DH is already retirement age, and I will be close by the time DS starts college. We are prioritizing saving in retirement accounts and I am figuring we will use those as required. DS does have a 529 that my mom set up for him, and contributes to from time to time, but I do not actually know its current value.

  7. Katherine Says:

    My employer offers free tuition at our institution or free tuition through tuition exchange. I hear that tuition exchange is not super easy to use, but several of my colleagues have children who are currently using it, so it seems like a pretty good option. Assuming I stay at this job, we will assume that any potential children would use one of those benefits, so we would only need to save for fees and room and board.

    • nicoleandmaggie Says:

      That is a very nice perk!

      My uni doesn’t even offer discounts at our own school, which is bizarre to me because you’d think they would want faculty brats to go here instead of a better school (assuming they get in).

    • omdg Says:

      Mine offers a similar perk…. for now. No idea if I will still be here when my daughter goes to college, or if that benefit will still exist. Seems dumb for me to bank on it though.

    • Leah Says:

      One possible downside on tuition exchange is study abroad. I know that, at my university, my friends with tuition exchange still had to pay full tuition for studying abroad (tho maybe because my uni didn’t run the programs — I applied to an outside school for my program). I had a 50% tuition remission which thankfully did cover study abroad, even tho I went through an outside school. Plus, as a bonus, the outside school had cheaper tuition than mine, so I saved money (sort of) by studying abroad. Of course, I spent my savings and then some during 4 months in Europe . . .

  8. chacha1 Says:

    I have to be honest, the balance between retirement and education is one of the (fairly long list of) reasons I chose not to have kids. What a better world it would be if everyone could just get the education they want, for free, and pay the state back by doing some civil service job for a while.

    There doesn’t appear to be much downside to just overloading the 529s. I mean, if it ends up not being needed for DC education, withdrawing for other purposes and paying income tax + 10% on just the earnings isn’t horrendous. Obviously none of us wants to pay an extra 10%, but … in GOPtopia, that may start looking like a bargain versus the student-loan interest rates and tuition amounts that might be standard in 6 years.

    • nicoleandmaggie Says:

      It would indeed be a better world. It’s a bummer we’re going back to the 1950s but this time without the GI bill.

      We can save for college outside of a 529 plan– the money will go into taxable accounts if it isn’t going into the 529.

    • gasstationwithoutpumps Says:

      I oversaved in my son’s 529, because we wanted enough to be able to pay full freight at one of the elite privates. (Saved 10% of gross income from the year he was born.) Now, even paying for an MS degree we’ll have excess in the 529, since he ended up going to UCSB. I’m going to keep the account open for a few years, in case he decides to go for a second Masters or a PhD, but eventually I’ll have to either find a new beneficiary or take the tax penalty.

  9. anandar Says:

    My feeling is that only your scenario #1 is really worth weighing against increasing your 529 contributions, because it is the only one that involves concrete tradeoffs. In scenario #2, if your kids end up not needing or wanting substantial 529s for either college or grad school, you will still have lots of appealing options, like hanging on to the 529s and redesignating any grandchildren as beneficiaries (a gift that your children’s future selves would likely deeply appreciate), or cousins, or even transfer ownership to someone else who does have a more-needy family member (I have some friends who are about to become foster/adoptive parents to teenager siblings, and if I ended up with more 529 money than I needed, I would transfer money to them in a heartbeat!).

    • Rosa Says:

      does transferring ownership retain the tax benefit?

      Cousins was our plan if there was excess (it’s not looking like there’s going to be, but we’ll see – *someone* in this family started working full time and not cashing his parents tuition checks while he was still in undergrad. Child might be less independent though.) but the age spacing of the whole cohort makes it unlikely. I really wish it were still tax exempt if you use 529 money to pay existing ed loans for an eligible person.

      Of course, in 8 years the only colleges still teaching fact based STEM in North America may be Mexican and Canadian so it might be moot.

  10. jane Says:

    PLEASE write about the ongoing 10 actions/100 days plan. The momentum must not die and pressure must be kept up …. or, if any of the children whose education you are concerned about are female, the savings for their education may become moot. Your children need equality, comprehensive healthcare equivalent to that CONGRESS has for all Americans; and all the other issues you care about that mobilized so many people Around the Globe to march. THANK YOU!!!!!!!!

    • nicoleandmaggie Says:

      I’m not actually sure that I’m impressed with their 10 actions/100 days plan. I guess I’ll have to see what the other 9 actions are (action 1 is writing a post-card which I can see working for Blue reps who need stories, but not as much for Red reps who really do need repeated phone calls and face to face visits), but I would much rather have people join their local indivisible group and sign up for one of the mailing lists under our “Activism” tab.

      So basically, 10 actions/100 days seems kind of weak tea. A start but it shouldn’t crowd out more active activism.

      • jane Says:

        Agree but something is better than silence. By the way…. I have been sharing about “indivisible” ever since you mentioned it and people are really excited by it and now, all these weeks later I am hearing other people mentioning it before I do which makes me think of the 100th monkey process. THANK YOU SO MUCH FOR WHAT YOU ARE DOING!!!!!!!! Thank you for your Activism tab. You ARE making a difference.

      • nicoleandmaggie Says:

        We’ve been getting a bunch more clicks on the Activism tab since the Women’s March, so I think that’s a good sign.

        I’ve also put together a two page document with links for people in my district who want to get involved and I’ve handed it out to a bunch of people who have asked how they can get more involved. There is a LOT of low hanging fruit in my red state, and probably a lot of red states right now. DH and I are making big differences just finding out about different groups and connecting them to each other. It’s crazy!

        We’re still not at a point where Action Tuesdays are going to produce anybody to go to our rep’s office, but as soon as we make inroads in the student body I think it will explode. (Our university dems organization only has 15 members and terribly run meetings and no desire to change.)

  11. Revanche @ A Gai Shan Life Says:

    I’m feeling a similar sense of “what is the best thing to do” – though we’re not at the same level of savings yet.

    We’ve invested $25,000 in JuggerBaby’s 529 so far, and I’m holding on to another $40,000 in CDs while I decide if it’s a good idea to keep adding to it or have the cash in case of fleeing. I’m not sure whether it makes sense to go ahead and drop it all in so it can grow and hope that in 16 years, or 4 Presidential cycles later, things will have settled enough.

    On a related note, the fact that we really need relocate quickly eating into our cash, and leaving us with mostly just a bare minimum of emergency cash alongside JuggerBaby’s savings, has me Quite Stressed.

  12. Solitary Diner Says:

    This post makes me really glad that I went to university in Canada! The most I ever paid in tuition was $7500 a year to go to medical school, which seems entirely reasonable given how much physicians earn. My undergraduate tuition was under $3000 at its highest.

    I’m going to put in an unsolicited recommendation to have your children contribute something towards their college educations. My parents encouraged me to start saving for university when I was in elementary school (as if I wasn’t weird enough), and I put away a portion of my allowance and gift money until I reached university age. Then when I got to university, I was expected to pay my own tuition/books/other expenses, while my parents provided me with housing and food. Their strategy taught me how small amounts of regular savings add up over time, and it made me value my university experience more than if it had all been paid for me.

    Just a thought!

  13. Emily Jividen Says:

    I guess we feel that we’re willing to pay for 4 years at public school, but not expensive private schools. Which hurts, because I went to Wake Forest and love it. It’s just not worth a quarter million, though.

    I second Solitary Diner on getting the kids to save. Part of our daughter’s allowance goes to her savings account “for college.” We’ve already started talking about costs and loans, because when it’s time for school we don’t want her to take her college costs for granted. She will have helped save from the time she was 5 (even if her amount right now is 50 cents a week.)

    • chacha1 Says:

      My folks didn’t ask us to “save for college” per se, but we both had jobs starting pretty early (I was, I think, 14 at my first (working at my dad’s office)), it was made clear that college was Expected and that the jobs were in service thereof, and we both were aggressive about scholarships. I got a full tuition/books scholarship from the local state college and lived at home till I was a senior. Had a grant for first round of grad school but after bailing out (Georgia Tech school of management, an intolerable nest of baby Gekkos in 1987) paid my own way through state U for my M.A.

      Personal feeling is that yes, investing your “own” money (even if it is part of an allowance) in schooling can help with focus. i.e. “I am paying for this, I had better not waste it.” Some kids may not be ready for that at 18, so I also feel a gap year can be hugely helpful. Especially if a kid has a hankering to go to a college that’s out of state from where she lived in high school – move, work, get residency, *then* go to college.

    • Revanche @ A Gai Shan Life Says:

      I have the same feeling of being willing to pay for 4 years but private school … I just don’t know about that. Perhaps the baseline is we’ll take care of public but you need to save up towards your living expenses and any extra you need for private school.

      • nicoleandmaggie Says:

        Keep in mind that a lot of fancy private schools are pretty generous with financial aid somewhat high up the income distribution, so they may be less expensive depending on your income/savings at the time.

        As to the other, we are really not worried about our kids taking college for granted. It is unlikely they’ll be on that margin, though at this point DC2 is still in preschool, so who knows. There is some research on the topic– IIRC working 10hrs/week during college helps college outcomes but working more than that hurts, but I may be misremembering the exact cut-off.

  14. First Gen American Says:

    I wanted to make sure that all my own needs were met first before plowing a bunch into college savings. Also I think retirement savings and your primary residence equity does not count as an asset in financial aid calculations. (Although it’s been a while so not sure how much the rules have changed). We will double down in a year once the mortgage is paid, but i wanted the house paid and the retirement healthy before spreading myself too thin.

    I too wonder what the real costs will be once the time comes. I just want all my other expenses behind me so that we have the cash flow to pay out of pocket if needed once the day comes.

    Maybe another question to ask is what does our household income need to be in order to be able to pay $55k/year? In reality, you were paying for private school and daycare already so you should be able to subtract at least that amount from the total required. Ie. “I can comfortably cover $25k/year out of pocket, so the real worst case scenario number I should be saving towards is $55K-$25k = $30K*4 = $120K. And don’t forget, you are already spending $12k/year on 529s, so that’s also another $12k/yr you can divert towards college expenses once the bills start rolling in. Theoretically you could also divert retirement contributions as well if your portfolio is good and fat by then. My back of the envelope calculation says just leave contributions as is. If you are looking for other places to put money then of course there is no harm in upping it, but I see no smoking guns, even if we are talking Ivy League. Job loss or and economy is something you want to buffer for too, but it shouldnt Scare you into saving $300k/kid.

    • nicoleandmaggie Says:

      We’re not paying for private school anymore, just daycare. I guess we had two years of paying for both a few years back. But that’s more like 16K.

      The 529 calculator includes still adding to the 529s during the 4 years of college, so that’s not subtracted out. Plus the kids are several years apart so it’s 6K at a time. (We would stop paying for DC1’s eventually and could redirect to DC2, but by the time DC1 is a senior we’ll have a better idea of how much hir college expenses are!)

      We would still be saving this money– there isn’t anything we need to spend it on unless we move (in which case we need a lot more saved than we currently have), it’s just that we wouldn’t be getting the tax advantage on the earnings. So we wouldn’t need to save less for retirement (unless, of course, DH loses his job in which case we might cut back). We’re currently maxed out on retirement so, as you note, there’s no better place to put it if we end up actually using it for college.

      Congrats on being able to pay off the mortgage in such a short time! How’s the renovation going?

      • First Gen American Says:

        Renovations are all consuming but it should get easier/faster/cheaper once kitchens and bathrooms are behind us. Those are the hardest and most expensive rooms and with a 2 family, you have twice as many to do. We are doing the last bathroom now. We are about 30% of the way there sq footage wise, 70% of the way there money wise. I will feel better once the 1st floor is completely dome, but that 3 more rooms and a bunch of chimney work so it’ll be a while yet. I do have a deep bathtub again (yeah). I really missed my baths.

        Hard to believe college is only 6 years away isn’t it?

  15. RBO answering First Gen American’s questions about #1’s finances post-mortgage | Grumpy Rumblings (of the formerly untenured) Says:

    […] decided to up it to $750/mo/kid, basically splitting the difference between what we’d need for a super pricey school and what […]

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